How to Swallow a Bigger Fish

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When Evelyn Sutherland joined Enercare in August 2011, it had about 140 employees. After six subsequent acquisitions, including two of companies many times its size, the head count now weighs in at roughly 3,800.

Evelyn Sutherland

What does it take to successfully integrate a much-larger company? It depends on the circumstances of the parties, of course, but the biggest key is staying highly organized and disciplined, says Sutherland.

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Enercare is a publicly held company listed on the Toronto Stock Exchange that focuses largely on home services. It rents out water heaters and HVAC equipment, mostly in the province of Ontario. The company also has a division devoted to submetering, which manufactures energy-usage meters for use by owners of multi-housing properties like apartment buildings and condominium complexes.

Enercare completed its most recent major M&A deal in March 2016, merging with Service Experts, which sells HVAC equipment in 29 U.S. states and three Canadian provinces. Enercare aims to convert much of Service Experts’ business from equipment sales to the more lucrative recurring-revenue rental model.

The other big deal was in 2014, when Enercare acquired Direct Energy’s Ontario home and commercial services business. The transaction reunited two companies that had been one until Enercare’s IPO in 2002, when it was spun off in order to take advantage of a tax vehicle available at the time.

After the split the two companies continued to work together in the same business, with Enercare getting 65% of the revenue in exchange for providing all of the capital needed to run the business. For its 35% Direct Energy provided operations, including marketing, call centers, equipment deliveries, and service calls.

CFO recently spoke with Sutherland about the challenges that arose and the solutions applied following the two mega-deals. An edited version of the discussion follows.

What was the thinking behind putting Direct Energy and Enercare back together?

The business [when the companies were separate] was very lucrative for Enercare, but we didn’t have much control. [The companies] were at cross-odds, with two different means of growing. So we bought out their share in a carve-out acquisition.

Taking the operations piece of the business back inside was a huge transformation. We went from 140 people to almost 1,000.

What were the biggest challenges in that integration?

A carve-out is always very challenging, because they didn’t have their own books and records. Also, it was an asset deal. Just switching out the ownership papers on 500 vehicles was a long and integrated task for a lot of people in the organization, touching almost every department.

In general, there were a tremendous number of tasks that came with that deal. Was any one single task difficult? No, probably not. But the volume of tasks required a lot of coordination, and a lot of that fell on the finance group, primarily finance operations.

How did you go about organizing all of that?

I attribute a lot of the success we had with the integration to the governance structure we put in place. And we spent a fair amount of money, hiring [PricewaterhouseCoopers] to help us coordinate the effort.

We set up about 12 different functional teams, each with a lead person from the Enercare side and a lead person from the Direct Energy side. Those two people in each group were making sure the correct information was funneled to and from the team members underneath.

The cadence of the meetings we had was set up very early on. We started the integration effort about four months before we closed the transaction. We wrote charters for each group, and the most important part of those was not “what are we taking care of,” but “what are we not taking care of.”

Why was that so important?

For example, if people thought the finance group was going to be handling communications with suppliers, and finance said no, we’re not going to do that, another group needed to pick that up or else finance would need to do it after all. We couldn’t have just left that off the table.

I attribute the success to the organization of that integration effort, the cadence of the meetings, and the communication – it was critical.

What do you mean by the “cadence of the meetings”?

You get into a rhythm. We established a governance structure that made sure everybody understood how to communicate with each other. We set the agenda in advance and scheduled regular meetings. We made sure the teams were filling out the needed documents and synthesizing information in the simplest form, so that when decisions were required, the steering committee could make them very efficiently.

When the executives got together, we needed to use our time in the most effective way. You know, you might have three decisions to make in a day, but you’re able to make them in 15 minutes.

What was it like integrating the companies’ cultures? They had once been a single company, but that was 12 years earlier.

That’s not a thing you can fix on day one or in six months. It’s a multi-year item that requires a lot of thought and patience. When you’re taking on seven times as many people, the culture and people are the number one issue. We’ve had to go through a process of redefining what we stand for, how we want to reward people, how we want to behave, and how to establish leadership qualities. And we’re still on that journey.

How did the cultures differ?

Direct Energy was owned by Centrica, the huge British gas company, through subsidiaries in the U.S. and Canada. So it was twice removed from the parent company. A lot of the senior leaders were British expats. There was a revolving door. The offices were moved from Toronto to Houston, and there were a lot of layoffs.

People were quite downtrodden from an ownership perspective, and when Enercare bought them out, it was an incredibly joyful event. Because this [business] is our baby, rather than having multiple children all over the world, if you know what I mean.

How different was the Service Experts deal?

It was almost the same monetarily, but we went from about 1,000 people to 3,800 people. We went from a company that was 95% Ontario-based to one that’s now across North America.

In terms of integration, this one had very different issues. It was a merger, in that we bought the shares of the company, so there was not as much complexity in integrating departments. But for the finance group it was much more complicated. You go from being an expert in tax in your area to “my goodness, now I have to understand taxes in 29 different states.”

So, doing a cross-border transaction involved a skill set that we didn’t really have. Structuring the deal was very complex.

You also had to transfer all of Service Experts’ financial reporting from U.S. GAAP to IFRS, right?

Yes, and we had to do it in record time. We closed the deal on May 11, and our Q2 reporting shuts down on June 30. So we had just over six weeks to do all the work.

[In contrast], when we converted from Canadian GAAP to IFRS [which was required for Canadian companies for fiscal periods beginning after Jan. 1, 2011], we took a year to do that.

So the teams worked night and day. We had 10 major projects in the finance group alone. We hired a project manager for finance. That was where most of the integration efforts focused. We had to handle the cross-currency fluctuations as well.

How about from an IT perspective?

We [implemented] a brand-new Hyperion system that helped us pull in all the general-ledger GL systems. The time frame for that was about eight weeks, because we needed to report by Aug. 5.

Was anything else tricky?

We probably wrote about 22 different memos supporting our accounting positions, how we were going to do the consolidation, and how we were going to present the financial statements. The memos covered the nitty-gritty details of how we got the numbers, how to show our segmentation differently, and how to package all of that and explain it to the marketplace.

We’ve gone through two quarters of that now and are in more of a rhythm. It’s not as difficult for us to pull together all those numbers and all that analysis.

What were the toughest aspects of converting Service Experts to IFRS?

Revenue recognition was key, primarily around Service Experts’ commercial business. Those are larger jobs and the revenue recognition criteria are different.

Also, they have a protection-plan business, as we do here in Ontario. Protection plans have multi-element transactions embedded in them, including service-oriented programs and maintenance programs. Depending on how you sell those two different kinds of contracts, the revenue recognition criteria can differ.

Second, about 2,000 vehicles had to transferred from operating leases to capital leases, which created a fairly significant change between the two sets of financial statements.

We also had to make sure our accounting policies were aligned. For example, we accrue our bonuses as we go throughout the year, while Service Experts, which is a much more seasonal business, began accruing bonuses when they became EBITDA-positive.

What are the upcoming challenges with Service Experts?

One of the reasons we bought the company is that they have a sales model, where we have a recurring-revenue model. We really felt we could transform that business into our model.

They never could have done that themselves. They didn’t have the capital. But Enercare generates a tremendous amount of cash flow, and one of our key areas of focus is funding growth. We have many opportunities, so we want to put our money into the highest-returning products like rentals.

[The goal is to] transform them from a 10% EBITDA margin business to more of a 50% EBITDA margin business, which is where [Enercare is].